Markowitz with regret

Rainer Baule, Olaf Korn and Laura-Chloé Kuntz

Journal of Economic Dynamics and Control, 2019, vol. 103, issue C, 1-24

Abstract: Providing a framework to integrate regret as an additional decision criterion in Markowitz’s model of portfolio selection, we propose two different views on regret: An investor might feel regret with respect to the ex-post best alternative either in terms of return or in terms of preference value. Under both views, regret can be captured by adjusting the vector of expected returns or alternatively by adjusting the return covariance matrix, retaining the tractability of the Markowitz model. The regret model, however, has very different implications for how asset characteristics affect optimal portfolios. While the impact of the skewness of an asset is strengthened, the impact of the variance shrinks. Moreover, we show for a variety of real portfolios that the effects of regret on optimal portfolio weights and the ex-ante return distribution are large.

Keywords: Portfolio selection; Regret aversion; Regret risk (search for similar items in EconPapers)
JEL-codes: D81 G11 G40 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188919300600
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:103:y:2019:i:c:p:1-24

DOI: 10.1016/j.jedc.2018.09.012

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().